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Why $21 Trillion in Debt Doesn't Bother the Credit Agencies

Reuters

By The Fiscal Times Staff

April 26, 2018

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The U.S national debt has surpassed $21 trillion, up 2.8 percent since the start of the year, but two of the leading credit agencies aren’t worried about the country’s ability to keep up with its obligations.

On Wednesday, Moody’s affirmed its Aaa credit rating for the U.S., and said that the outlook remains stable. The agency said the rating “reflects the US' exceptional economic strength, the very high strength of its institutions and its very low exposure to credit-related shocks given the unique and central roles of the US dollar and US Treasury bond market in the global financial system.” Taken together, these strengths “remove all but the most extreme liquidity risks from the US government securities market, despite a rising debt burden, and grant the US effective immunity from government liquidity and balance-of-payment risks.”

Moody’s did note that U.S. “fiscal strength” has weakened recently, but remains high relative to the rest of the world. It said fiscal pressures are rising due to “ageing-related entitlement spending, higher debt service payments, and recent policy actions that will likely reduce future revenues and increase expenditures.” Moody’s did warn, however, that if policymakers are unable to address those issues in the coming years and the U.S. continues to lose “fiscal and institutional strength,” the agency could reduce its rating.

Fitch Ratings this month also affirmed its AAA rating for the U.S., saying that while the tax cuts passed in December will lead to higher deficits and debt, the top-notch rating “is supported by structural strengths including the size of the economy, high per capita income, and a dynamic business environment.” Fitch said it considers U.S. debt tolerance to be higher than that of other sovereign issuers, though it warned that running large deficits at this stage of the economic cycle “puts the public finances in a weaker position to confront any future economic downturn.”